Concerns are growing among retirees about how upcoming inheritance tax (IHT) reforms will interact with workplace pensions, particularly defined benefit schemes.
One reader, Steve and his wife, both receiving pensions from the Lloyds Bank defined benefit arrangement, asked whether their pensions would need to be valued and declared for probate purposes if one of them dies.
Under their current arrangements, each spouse would receive a reduced survivor’s pension upon the other’s death.
They have also completed the necessary nomination forms and written wills leaving their estates to each other, leading them to believe their situation would qualify as an excepted estate with no inheritance tax due.
The Core Concern: Whether DB Pensions Count Toward Probate Value
A key uncertainty for the couple is whether the ongoing survivor pension would need to be assigned a capital value for inheritance tax reporting, even though no lump sum is payable.
They already understand that probate would still be required to manage any savings or investments held individually, but questioned whether the defined benefit pension itself forms part of the taxable estate under the forthcoming rules.
Government Plan to Include Pensions in the IHT Net
Expert commentary from former pensions minister Steve Webb highlights that pension taxation is set to change significantly from April 2027, when unused pension funds are expected to fall within the scope of inheritance tax.
The policy shift is based on the idea that pensions are intended primarily for retirement income rather than wealth transfer.
Policymakers have raised concerns that some individuals have been preserving pension pots specifically to pass them on tax-free, while using other assets during retirement instead.
However, Webb notes that while the policy reference often focuses on “pension pots,” typically associated with defined contribution schemes, the treatment of defined benefit pensions is less straightforward.
Spousal Exemptions Remain a Key Protection
Despite the planned reforms, one central rule remains unchanged: transfers between spouses or civil partners continue to be fully exempt from inheritance tax.
This means that where a defined benefit scheme simply provides a survivor’s pension to a spouse or civil partner, no inheritance tax liability arises.
In such cases, there is also no requirement to assign a capital value to the pension for probate or tax purposes.
For Steve and his wife, this suggests that their current arrangements are unlikely to be affected by the upcoming changes.
When Defined Benefit Pensions Could Still Trigger Tax
While standard survivor pensions are expected to remain outside the scope of inheritance tax, complications may arise in other circumstances.
One area of uncertainty involves benefits paid to individuals who are not spouses or civil partners, such as cohabiting partners or financially dependent children.
These payments would not qualify for spousal exemption and could potentially fall within the inheritance tax regime.
Another grey area relates to lump sum payments linked to defined benefit schemes.
Although Steve Webb notes that death-in-service benefits are expected to remain exempt, other payments—such as death-in-deferment lump sums, refund-of-contributions arrangements, or minimum guaranteed payout provisions—may be treated differently.
These distinctions remain under review, and clear guidance from HMRC has not yet been fully published.
HMRC Acknowledges Ongoing Uncertainty
An HMRC spokesperson confirmed that further clarification is still being developed ahead of the 2027 implementation date.
Officials stated that updated guidance and regulations will be released gradually over the coming months to help schemes, advisers, and individuals understand how the new rules will apply in practice.
How Inheritance Tax Works Under Current Rules
At present, inheritance tax is charged at 40% on estates exceeding certain thresholds.
Individuals can pass on up to £325,000 tax-free, or £650,000 for married couples or civil partners, under the standard nil-rate band.
An additional residence allowance can increase the threshold by up to £175,000 per person when a main home is passed to direct descendants.
This can raise the combined potential tax-free allowance for couples to £1 million in some cases.
However, this residence-related allowance tapers off for estates valued above £2 million and is completely removed once the threshold reaches £2.3 million.
These thresholds are currently frozen until 2031.
Conclusion: Limited Impact for Standard Spouse Pensions
In summary, experts suggest that individuals in situations like Steve and his wife—where the only benefit is a survivor’s defined benefit pension paid to a spouse—are unlikely to face additional inheritance tax liability under the new 2027 rules.
However, uncertainty remains for more complex pension structures involving lump sums or non-spouse beneficiaries.
With less than a year before implementation begins, both advisers and regulators continue to call for clearer guidance on how the new system will operate in practice.
